Why China’s Debt Defaults Look Set to Pick Up Again

Chinese companies are facing a reality check after years of ramping up debt. A de-leveraging campaign that President Xi Jinping began in 2016 to curb risks in the nation’s financial markets has led to a crackdown on unregulated lending -- so-called shadow banking -- and tighter rules on asset management. That made it harder for some to raise funds to repay existing debt, leading to a record number of bond defaults in 2018. There was a respite in the first half of 2019 as the government tried to alleviate the liquidity crunch, but by early December defaults set a new record, due in part to slowing economic growth. Contrary to what many investors thought, state-owned borrowers can’t count on a bailout.

It’s big, with the potential to worsen. The total of Chinese onshore company bond defaults this year reached 148 by Dec. 9 -- well past the 2018 record of 120. Missed payments totaled almost 126 billion yuan ($17.9 billion) by then, compared to last year’s all-time high of 122 billion yuan, which itself was more than quadruple the 2017 amount. Private sector firms accounted for more than 80% of total defaults this year, according to Bloomberg-compiled data. Moody’s Investors Service said it expects 40 to 50 new, first-time defaulters in 2020, compared with 35 so far this year.